THE COMMISSIONER OF INCOME TAX, LAHORE vs MESSRS UNIVERSAL LIFE AND GENERAL INSURANCE Co
This petition for leave to appeal arose from a judgment of the Lahore High Court concerning the allowability of establishment and salary expenses claimed by an insurance company for the assessment years 1959-60 and 1960-61. The respondent company had commenced its life insurance business prior to obtaining the requisite certificate from the Controller of Insurance under the Insurance Act. The Income-tax Officer and Appellate Assistant Commissioner disallowed a portion of the expenses on the ground that carrying on business without the certificate rendered it illegal. The Income-tax Appellate Tribunal allowed the assessee's appeal, and the High Court answered the reference in favor of the assessee, holding that tax authorities are concerned with income regardless of its lawfulness, and considerations of penal liability under insurance law are alien to income-tax law. The Supreme Court dismissed the petition, holding that if income is subject to taxation even if earned unlawfully, corresponding expenses incurred in earning or attempting to earn such income cannot be denied solely on the ground of regulatory non-compliance.
- Whether expenses incurred before the actual commencement or formal certification of an insurance business are permissible deductions under income-tax law?
- Does the carrying on of a business without obtaining a regulatory certificate disentitle the assessee from claiming deductions for establishment charges and salaries?
- Are considerations of legality or penal liability under separate regulatory statutes relevant to the determination of taxable income and allowable expenses under income-tax law?
- Companies Act
ORDER
1. DORAB PATEL, J.-The respondent used to carry on the business of life insurance and it was incorporated as a company under the Companies Act on the 5th of May, 1958. Now, in order to carry on business under the Insurance Act it also had to obtain a certificate from the Controller of Insurance, which it obtained in January, 1960. However, it had commenced business before obtaining certificate from the Controller of Insurance, therefore, for the assessment years 1959-60 and 1960-61, it claimed expenses on account of establishment charges and salaries. The Income- tax Officer restricted the expenses allowed to 20 % of the amount claimed against the respondent's income from its investment. However, he disallowed the other expenses on the ground that the respondent was not entitled to carry on the business of life insurance without obtaining its certificate of incorporation and as this was obtained in January, 1960, he rejected 80% of the claim for expenses incurred prior to this date.
2. The respondent filed an appeal against this rejection of its claim for expenses, but as the appeal was dismissed by the Appellate Assistant Commissioner, it filed an appeal before the Income-tax Appellate Tribunal was allowed on 21-2-1969. Therefore, as the petitioner wad aggrieved by this order, it referred to the Lahore High Court the question whether the Tribunal "was right in holding that the expenses incurred before actual commencement of the insurance business , was expenses and permissible in the hands of the assessee. " As the learned Judges of the High Court answered this question in the affirmative and against the petitioner, it has filed his petition for leave.
3. In rejecting the petitioner's reference, the learned Judges of the High Court observed in their judgment :-- "The Income-tax Department is concerned with the income of a person whether it has been earned lawfully or unlawfully. Con--sequently, the allowance on account of expenditure has also to be made irrespective of whether it was made during the period income was being lawfully earned or unlawfully. There was nothing to stop the assessee from carrying on business of insurance even before it received the certificate of insurance and in such case he might make himself liable under the insurance law for penal action, but such a consideration would be alien to income-tax and the law applicable to it."
4. Mr. Abdul Haque challenged the validity of these observations and submitted that any business carried on by the respondent before the date on which it had obtained its certificate from the Controller of insurance was illegal, and that this was fatal to its claim for expenses. We regret our inability to agree with this view because, as rightly pointed out by the learned Judges of the High Court, if the respondent had earned any income, even though illegal, it would have been liable to taxation, and we may also observe that this was also the view taken by the Judicial Committee in Canadian Minister of Finance v. Cecil R. Smith (136 LTR 175).
5. No exception can, therefore, be taken to the view of the High Court and this petition is dismissed.